How to start investing in a locale with no state income tax
If you think investing in a state with no state income tax might be right for you, there are a few steps to get started. Check them out so you have a better idea of what you need to do to move forward with your investment strategy.
Perform a market analysis
Your overall tax burden shouldn't be your only qualifying factor when looking for a market in which to invest. Truthfully, it should all come down to the strength of the real estate market. To find out where a particular market stands, your best bet is to do a real estate market analysis.
To start, look at the sales data for the area: how many homes are for sale overall, the average days on market, and other metrics that will give you a sense of the area's supply and demand. Usually, you can use Redfin (NASDAQ: RDFN) or Zillow (NASDAQ: Z) (NASDAQ: ZG) to get a sense of this data.
Once you have a general market in mind, get into the nitty-gritty of various neighborhoods. Look at school district data and crime rates, as well as data for current development. In more densely populated areas, this information is often provided by the city or county.
Talk to a tax professional
After you have a better idea of the area in which you would like to invest, talk to a qualified tax professional, preferably one local to the area. If your overall tax burden is an area of concern, talking with a professional can help you get your questions answered before you even invest time into looking for a property.
You'll want to ask how any taxable income should be handled on your tax return. If you plan on doing a fix-and-flip strategy, you should also ask about capital gains taxes. Additionally, depending on the structure of your business, you may want to inquire about corporate income.
In general, the more information you can get about the state tax rate, the better you'll feel. Armed with this knowledge, you should be better prepared to make a decision on whether you want to move forward with investing in that particular real estate market.
Find a real estate agent
If you do decide you want to invest in one of these areas, the next step is to build a team of local real estate professionals. Start with a local real estate agent. From there, your agent will likely be able to use their network of professional connections to help you get in contact with a lender and, if necessary, a property manager or general contractor. Once your team is in place, you can begin the remote investing process the same way you would in any other area.
The bottom line
Investing in a state with no income tax may sound like a good idea. However, as an investor, income tax is only a portion of your tax burden. Often, these states make up their revenue in different ways, so make sure you understand all the ways you'll be taxed. With that in mind, speak to a tax professional who can help you find ways to lower your overall tax bill.